Reforming the taxation of pensions to remove upfront tax relief could net the Treasury up to £20 billion a year, without disadvantaging pension savers over the long term, according to new analysis from Hymans Robertson.
Its analysis models removing up front tax relief but enabling savers to take benefits tax free at the point of retirement.
It says that over time the tax relief provided and level of expected net income would remain the same for pension scheme members.
However Hyman’s analysis calculates that the government would gain billions of pounds from tax on pensions contributions immediately.
It adds that this change would not impact company profits. It says that the £20 billion a year that could be generated from this would enable the governed to invest, for example in the National Wealth Fund (NWF) and Net Zero-aligned sectors, and UK communities and growth.
Hymans Robertson head of pensions policy innovation Calum Cooper says: “Under the current system this tax relief is an incentive for the worker to save. This pension money, including the tax relief incentive is then often invested overseas.
“When workers retire, the majority of the tax relief is expected to be clawed back by the Government as most workplace pension income is taxed in payment. In fact, the typical worker who paid £800 into their pension will return £150 of their £200 ‘incentive’ to the Government through tax. This leaves them with only £50 of extra money in their final pension pot.”
Explaining how pensions taxation could be changed Cooper adds: “Instead of offering tax relief on pension contributions the Government could simply give the net £50 incentive ‘Government Bonus’ that the worker retains as an up-front top-up payment (through tax relief or another mechanism). After this pension savings could be completely tax-free.
“This can be designed so that the expected pensions cash and income received is unchanged.”
He adds that provided the money generated from these savings is invested in the UK, and for green growth there is alignment with the interests of future generations too.
“This could materially accelerate much needed investment in the UK and could keep expected pension income at retirement and take-home pay unchanged without costing anything more for employers. Because future pensions would be tax free, it would make it simpler and more certain for people to plan for later life.”
Cooper adds: “Overall, this approach brings forward more than £20 billion a year for the Government to invest in UK Growth, whether that is through the National Wealth Fund (NWF), UK communities, and in net zero-aligned sectors. If three times as much private sector capital is crowded in to the NWF as outlined in the Chancellor of the Exchequer’s current plans, this would lead to £80bn NWF investment a year. After a decade it could provide a NWF of more than £1 trillion. This would positively impact the Government’s debt-to-GDP position over the critical 5-year time horizon, reflecting that a material state asset is being built up that was otherwise invested globally.
“The scale of this long-term ambition is enormous but achievable. To do this the communication and oversight would need a great deal of care. But we do not have decades to find the money to meet the UK’s investment and productivity needs, including the commitment to net zero.
“The dividend to the next generation from sustainably investing in the UK, done well, would be huge. This scale of change would need time to get operationally ready, and independent oversight and governance would be essential to ensure that value accretes fairly to the next generation. But all of this gives the NWF time to get to scale too.”